Stop Loss and Marketing

Because the employer retained ultimate legal responsibility for payment even if the carrier failed, unlike traditional excess coverage

Stop-loss failed to be excess insurance because the employer retained ultimate legal responsibility for all benefits even if the stop-loss carrier failed. In traditional excess coverage, the excess carrier assumes that ultimate liability.

Direct insurance, because such a low deductible is so close to a fully insured plan

The NAIC model statute provides that a stop-loss agreement with a modest specific deductible (like $500) should be treated as direct insurance because it is functionally so close to a fully insured plan. Significant deductibles (like $100,000) are treated as stop-loss, a fourth type of insurance.

ERISA and the Monsanto decision

Prior to ERISA and the Monsanto decision, stop-loss as we know it did not exist. ERISA allowed employers to design and administer health care plans free of state regulatory control, and Monsanto allowed employers to fund such plans as miniature insurance companies without being deemed in the insurance business.

The employer was not a legally licensed and regulated insurer

Stop-loss failed to be reinsurance because the employer was not an insurer (i.e., one legally licensed and regulated as such). Reinsurance, by definition, is a transfer of risk between insurers.

10%-20% of the gain or loss

A typical stake in the risk for the MGU is 10%-20% of the gain or loss, but this will vary by carrier. Sometimes the MGU will take on risk directly through its own captive reinsurance company.

A full service MGU has full authority while a basic service MGU has limited authority

The main distinction between types of MGUs is that full service MGUs have full authority over underwriting, claims, and policy decisions, while basic service MGUs have limited authority and must seek carrier approval for actions exceeding their limits.

High-dollar claims and underwriting actions are reviewed and approved by the stop-loss carrier

When the MGU operates within the authority limits set by the fronting stop-loss carrier, high-dollar claims and underwriting actions that exceed those limits are reviewed and approved by the stop-loss carrier itself.

Financial stability and commitment to the product without relying on new business to cover losses on older blocks

The MGU should be committed to the product and be financially stable, able to weather the ups and downs of the business. It should not have to rely on new business to cover losses on its older blocks.

A licensed insurance company issues a policy but transfers most or all of the risk to another entity such as a reinsurer or captive insurer

A fronting arrangement is when a licensed insurance company (the fronting carrier) issues a policy to a client but then transfers most or all of the risk to another entity, such as a reinsurer or captive insurer. The fronting carrier provides access to the licensed and regulated insurance market.

Different agencies use different methodologies and may rate the same carrier differently; a carrier rated well by one agency may have concerning ratings from others, giving a more complete picture of financial strength

Multiple rating agencies (A.M. Best, Moody's, S&P Global, Kroll, Weiss, Fitch) use different methodologies. Checking several provides a more complete picture of carrier financial strength, since a carrier may receive different ratings from different agencies.

Collateral such as letters of credit or deposited securities

Non-admitted carriers must provide states with collateral (letters of credit, deposited securities) to gain recognition for their reserves on their filed balance sheet. This is a protective device used by state insurance departments.

The carrier's premiums due from the plan being offset against reserves held on behalf of the plan's claims

Setoffs mean the stop-loss carrier's premiums due from the plan may be offset against its reserves held on behalf of the claims of the plan covered under the agreement. This is also called net accounting.

Incurred during the 12-month agreement year and paid during the agreement year plus 3 additional months

A 12/15 contract means claims are incurred during the agreement year (12 months) and paid during the agreement year plus an additional 3 months (15 months total payment window). The 't' months are usually three or six.

Includes claims incurred 3 months before the agreement period that are paid during the agreement period

A 15/12 (or run-in) contract covers claims incurred 3 months before the agreement period and paid during the agreement period, in addition to claims incurred and paid during the agreement period. This contrasts with a 12/12 which only covers claims incurred and paid during the agreement year.

125% of expected claims

The aggregate deductible is expressed as a dollar amount and is usually set at 125% of expected claims based on the plan design and number of participants in the plan.

5%-15% of expected claims

The specific deductible is usually set at 5%-15% of expected claims but can be higher based on the plan sponsor's financial health and willingness to assume risk.

30% of eligible employees

The carrier's self-funding underwriting guidelines typically allow for up to 30% HMO penetration. When enrollment exceeds 30%, the carrier will generally decline to quote aggregate coverage, regardless of the administrator involved.

At least 75% of eligible employees enrolled in the plan

Stop-loss carriers expect at least 75% of eligible employees to be enrolled in the plan. Eligible employees are those in an eligible class or those covered under comparable group insurance plans.

50% of the cost of coverage

The employer should contribute a minimum of 50% of the cost of the coverage. A typical arrangement is 50% of employee cost and 0% of dependent cost.

Lasering

Lasering is the practice where a stop-loss provider assigns a covered individual with large, ongoing claim risk a higher specific deductible than the rest of the group. This keeps the group's annual specific premium lower.

Only claims incurred toward the specific predicted costly treatment will invoke the higher deductible

A conditional or contingent laser only applies if the member receives the specific predicted costly treatment (e.g., a heart transplant). If the member incurs claims unrelated to the condition (e.g., a broken leg), those claims are considered at the group's standard specific deductible.

The laser amount is pure claim paying dollars with no premium tax or overhead expenses included

One advantage of lasers is that the laser amount is pure claim paying dollars, with no premium tax or overhead expenses included. Other advantages include long-term savings on annual specific premium and the possibility that the high-cost member may not hit their laser.

Reduced stop-loss premium costs without reducing the employer's exposure, with costs guaranteed not to exceed the standard premium

The aggregated specific benefit gives the employer reduced stop-loss premium costs without reducing exposure. If specific claims experience is favorable, the employer receives an immediate benefit in the form of reduced premium costs, while the cost is guaranteed not to exceed the standard premium.

50% of covered expenses

In the tiered specific example, the carrier pays 50% of covered expenses from $30,000 to $40,000, then 75% from $40,000 to $50,000, and 100% above $50,000 to the policy maximum. This permits an employer to risk more on specific and less on aggregate.

They are giving up profit when the total specific paid claims are low or non-existent

A carrier must be careful not to have a large percentage of aggregated specifics in their book of business because they are giving up profit when total specific paid claims are low or non-existent, since the employer receives the benefit of reduced premiums in favorable claims years.

Labor unions and MEWAs/associations

Most stop-loss carriers have certain types of groups they will not accept or will underwrite conservatively, including labor unions, MEWAs and associations, medical clinics, religious organizations, municipalities, employee leasing companies, and others.

Potential COBRA participants in their 60-day waiting period who may elect COBRA after terms are set

Stop-loss carriers usually assess a markup on rates for potential COBRA participants who are not on the census because they are in their 60-day waiting period and who, after terms are set, elect COBRA and must be covered.

At least the current and one prior year of recent monthly paid claim data

For groups over 100 lives, claims experience is generally mandatory, requiring at least the current and one prior year of recent monthly paid claim data. For groups of 500+, it is beneficial to include two prior years.

50% of the current specific deductible

For the best underwriting outcomes, self-funders should include monthly aggregate reports and specific reports with anyone having claims exceeding 50% of the current specific deductible, along with two years plus the current year of data.

Collectively bargained benefit arrangements

The course lists 'not collectively bargained' as a characteristic of a good self-funded risk. Collective bargaining issues indicate a lack of employer control over the plan and are viewed unfavorably.

Three times

A group that has changed carriers more than three times in the last five years will often not be quoted. This restriction reflects concern about adverse selection and instability.

Most carriers require a minimum of 25 lives because smaller groups lack sufficient statistical credibility for underwriting, making claims experience volatile and unpredictable

The typical minimum group size for stop-loss is 25 lives (unless the state mandates otherwise). Groups below this threshold lack the statistical credibility needed for reliable underwriting — their claims experience is too volatile to price accurately.

It leaves the run-in claims from the prior contract period uncovered

Promoting the 12/12 (incurred in 12 and paid in 12) on renewal is considered questionable because it leaves run-in claims—those incurred under the prior contract period but paid in the new period—uncovered, creating a gap.

A monthly aggregate accommodation, where the carrier provides interim loans against anticipated aggregate reimbursements so the employer can continue paying claims without a cash flow crisis

The monthly aggregate accommodation allows the carrier to provide loans against aggregate reimbursements so the employer's cash flow isn't burdened. This is a critical feature for smaller employers who may not have reserves to bridge the gap between aggregate breach and carrier reimbursement.

When the HMO benefits are self-funded and included as part of the carrier's program

Exceptions to the 30% HMO penetration rule include large groups with a history of stable enrollment, and when HMO benefits are self-funded and included as part of the carrier's program, where HMO/PPO benefits and indemnity benefits share the same attachment point.

Most of the risk

In the direct method, the stop-loss carrier is a direct writer providing all services with its own staff. A direct stop-loss carrier will retain most of the risk, in contrast to MGU/indirect arrangements where the provider often retains little or none.

Below the specific attachment point, counting only toward the aggregate

Self-funded claims below the specific attachment point count toward the aggregate. In the monthly aggregate accumulation report, claims below the specific attachment point are tracked as plan paid claims. The specific stop-loss only reimburses once an individual exceeds the specific deductible.

A life company files stop-loss as a health contract and is precluded from writing in states requiring property and liability filing; the broker must use a property and casualty carrier or a reinsurer/pool syndicate instead

The three types of excess loss carriers are life/accident/health, property and casualty, and reinsurers/pools. A life carrier files stop-loss as a health contract, so it cannot write in states requiring property and liability filing — a critical state-specific placement consideration.

A life insurance company

The life company will file as a health contract, either direct or as a reinsurance contract. Where the state requires stop-loss to be filed as a property and liability contract, the life carrier is precluded from writing in that state.

60-90 days after termination

The aggregate run-out option provides the employer with protection in the event of policy termination for medical expenses paid within 60-90 days after termination of the aggregate benefit, provided they were incurred prior to the termination date.

0%-5%

While the overall medical cost trend factor may be 9%, specific stop-loss premiums typically trend at 0%-5%. The trend factor is lower for smaller claims and higher for longer/larger claims. Self-funded aggregate (funding factors) trend at 5%-12%.

65% through intermediary vs. 75% direct

Expected loss ratios for the carrier are: Specific Direct 75%, Specific Through Intermediary 65%. For aggregate: Direct 65%, Through Intermediary 55%. The lower ratios through intermediaries reflect the additional costs of the intermediary layer.

Often 50% or 75% of the specific

Stop-loss carriers want detail on any participant who reaches a preset percentage (often 50% or 75%) of the specific in paid claims as an early warning of a claim. It is also advisable to notify the carrier at once of any claim with potential, regardless of the amount paid.

The plan might pay the claim, but the stop-loss may not reimburse the employer due to the broader exclusion language

This illustrates a gap between plan and stop-loss exclusions. The plan excludes benefits for felonies (the child committed no felony), so the plan might pay. However, the stop-loss excludes criminal or illegal acts as the cause, which is broader and may cover the fight itself, so stop-loss may not reimburse.

Stop-loss is not excess or reinsurance; it is either direct or a fourth type of insurance depending on facts and circumstances

The NAIC model statute provides that stop-loss is not excess or reinsurance. It is either direct insurance (with a modest specific deductible) or a fourth type of insurance (with a significant specific deductible), depending on facts and circumstances.

$100,000

The aggregated specific is generally only offered to plans that generate at least $100,000 in annualized premium. It gives the employer reduced stop-loss premium costs without reducing the employer's exposure.

It paid the employer, not the beneficiary

Stop-loss failed to be direct insurance because it paid the employer and not the beneficiary. Direct insurance traditionally involves payments to the insured individual or their healthcare providers.

The plan may be liable for claims without stop-loss protection for certain individuals

If the agreement definition is narrower than the plan definition, there is potential for the plan to be liable without stop-loss protection. For example, the plan may cover a disabled dependent that the stop-loss agreement excludes.

10%-20% of the annual aggregate maximum

There is a dollar limit on the benefits allowed toward the aggregate that were incurred in the previous plan year and paid in the plan year (run-in limit). Such benefits normally must not exceed 10%-20% of the annual aggregate maximum.

The issuing carrier is responsible for the claim regardless of whether the carrier is a direct writer or an indirect (fronting) writer

The issuing carrier is responsible for the claim, regardless of whether the carrier is a direct writer or an indirect (fronting) writer. This is a critical consumer protection principle in stop-loss arrangements.